Tax transparency – the rise of an ethical ESG-based approach

19 July 2023

Once upon a time, in the last millennium, tax advisers would manage the global tax rate of global groups to as low as humanly possible. Companies wanted aggressive tax planning and these big-brained boffins delivered. They would spend hours inventing schemes with names such as ‘tower’ and ‘civet’ which obtained double and sometimes even the holy grail of a triple deduction across various jurisdictions in the group. Just like ‘Knight Rider’ and ‘Dallas’ those days are confined to the annuls of time and, in the words of Bob Dylan, 'the times they are a changin’.

Are corporates paying the right amount of tax in the right place at the right time? 

As part of the ESG agenda, corporate tax is coming under increasing scrutiny for investors.  Ethical investors and responsible investing bodies such as the PRI recognise that there is a relationship between business and society that is captured by corporate tax. Companies obtain benefits from society in the form of the various services from which corporates benefit for example, infrastructure, education, security, healthcare. The direction of travel in the current day and age is very much that businesses should pay the right amount of tax in the right place at the right time. Not only does this mean that corporates have a robust tax base from which to undertake any structuring / refinancing without fear of fiscal authorities challenging on ‘easy wins’ in the form of obvious tax avoidance it also assists with positive public messages. The impact of the opposite approach, where tax is seen as a cost to minimise, has been evident in the form of the reputational risk to companies in the public domain that are seen to take an aggressive approach to corporation tax where customers are potentially put off brands. Certainly, in the post covid world where there are large budgetary deficits, governments are likely to take action to close loopholes and recover unpaid taxes. 

Understanding the true cost of aggressive tax planning

Going back to the world of ‘tower’ and ‘civet’, the cost of defending the position was never built into the Net Present Value (NPV) tax savings calculation. Stakeholders and boards got wise to the reputational risk and the follow up cost in adviser fees to gain agreement to the aggressive positions taken.

Changing KPIs for heads of tax

Some companies are actively managing their approach to corporate tax. For example, the performance criteria for heads of tax are changing to include ethical and reputational metrics as well as the more historical performance criteria around tax compliance. The value of proactively managing tax risks should not be underestimated as resolving a fiscal challenge can be very time consuming for staff and potentially costly in terms of advisor fees. So, there is cost saving as well as a reputational upside in considering the approach to corporate tax and embedding the mantra of transparency and compliance within the company’s DNA. 

Using technology to understand the tax profile

Tax transparency is an important part of ESG, which is becoming ever more front and centre in the strategic and operational decisions of businesses, and also investment assessment as tax risks are on the rise but transparency is sometimes lacking. Investors and Boards are calling for clearer articulation of businesses’ position on tax and in particular their approach to responsible tax planning and compliance and also publication of a global tax strategy and country by country reporting. In order to deliver this, and help demystify the often-complicated world of tax, forward thinking tax professionals are increasingly deploying technologies such as data analytics, dashboards and risk management tools (such as the RSM Tax Governance Suite) to improve both the visibility of information and the links between tax and the wider business.     

Corporate tax is a key societal concern

According to the Institute of Ethics annual surveys in the UK on societal concerns the two issues that continually arise are executive remuneration and corporate tax. The amount of time investors dedicate to executive remuneration is a huge part of the governance dialogue and corporate tax to date has not received the same degree of attention. However, investors are increasingly incorporating the latter into their business as usual, and this is likely to become ever more part of the ESG mindset and evaluation process for investors and stakeholders. 

Approach to tax is a key indicator of where a company sits on embedding an ESG mindset

Tax is increasingly seen as an issue of societal concern. It poses risks not only to individual companies, in the form of reputational risk and risk to management but also payment of tax is important in order to ensure that society is sustainable and evolves and develops at the pace required by corporates to meet their own sustainability and longevity objectives. A company’s approach to tax is coming under scrutiny and is seen as a key area of insight into a company’s governance and wider ESG mindset. Because of this, it’s important for corporates to have a clear policy and ensure this is demonstrably met by their actions and approach to tax.

How RSM can help

RSM is a leading audit, tax and consulting adviser to mid-market business leaders. We have extensive experience working with clients in the renewables and cleantech sectors and are committed to supporting businesses in the industry.

If you would like to discuss corporate tax strategy for your business, please contact Sheena McGuinness.

Sheena McGuiness
Sheena McGuinness
Partner, Co-head of Energy & natural resources  
Sheena McGuiness
Sheena McGuinness
Partner, Co-head of Energy & natural resources